Walking on salmonella-laced eggshells, wondering whether we’ve finally seen the worst of the BP oil spill, it’s clear that the world remains as risky as ever. By the time I post this blog, there will probably be yet another new headline with another unlikely risk that few of us saw coming.

As a  financial planner, I think about unlikely risks all the time. While we can only do so much to avoid a bad egg before it’s been recalled, there are reasonable steps you can take to mitigate some of the bigger “unlikely” risks. Here are some examples.

Premature Death. For most people, the chance they will die tomorrow is remote. But the consequences are too severe to ignore. Just in case, almost everyone needs a will. In addition, people who have substantial estates need expert planning to minimize possible estate taxes.

Contrary to what a life insurance salesman might tell you, not everyone needs life insurance. Nevertheless, in our comprehensive financial planning process we always examine whether the risk of death should be transferred to an insurance company by buying a life insurance policy. Life insurance most often makes sense for the younger client whose estate is not yet large enough to provide for the family if the breadwinner dies. But as the breadwinner nears retirement age, the need for life insurance as a risk management tool wanes. For this reason we usually recommend “term” life insurance policies, which expire after a certain term, and we avoid the much more expensive “whole life” policies.

Living Too Long. The flip side of premature death is outliving your money. Average life expectancy is around age 78. But if you’re a non-smoker, add six to nine years to the average. Moreover, constant medical advances are gradually extending life expectancy. Referring to the MoneyGuide Pro Annuity 2000 Mortality Table, the bottom line is that, for the average non-smoking couple, there is a 50% chance at least one spouse will live to age 91, and a 10% chance that at least one spouse will live to 101.

Health and Disability. Health insurance is a must, and disability insurance (though often expensive) should at least be considered. Depending on the situation, long-term care insurance may be appropriate too.

Cars and Trucks and Things That Go. When it comes to liability claims, every wealthy person is a potential target. Everyone who has a high net worth needs an umbrella liability insurance policy to protect their assets against potential lawsuits resulting from events like car accidents. Yes, it’s a remote possibility that you’ll get into a car accident, that it will be your fault, that someone will be seriously injured and that they will successfully sue you for millions of dollars. But it can happen, and it is a relatively cheap risk to insure against. Typically we recommend at least a million dollars in umbrella coverage, and often more.

We take our risk management analysis beyond insurance to “asset protection” strategies, legal strategies that can protect assets from lawsuits after the insurance runs out. If you’re not sure you have adequate personal risk protection, call us. We don’t sell products or prepare legal documents ourselves, but we help you provide an objective risk review, strategy recommendations and appropriate referrals.

Market Risk. Finally, some risks are far from remote, but when they occur many people are shocked anyway. Take the U.S. stock market. Since 1926, we’ve seen negative annual returns about a quarter of the time, usually in the double digits. If the stock markets weren’t subject to periodic ”head for the hills” panic runs, more people would invest, and remain invested. Supply and demand then would drive prices up and returns down. 

But, while periodic bad markets are expected, they aren’t predictable; nobody knows when they’ll begin or end. Our goal is to help investors (1) remain committed, ready to capture any upswings that may occur and (2) dampen some of the stock risk by blending stocks with bonds in well-diversified portfolios that meet the client's investment objective, bearing all of their financial goals in mind.

If you’re not sure whether your personal risks have been adequately addressed, give us a call.

 I enjoyed reading Jason Zweig's most recent column, "Holding Brokers To a Higher Standard,” in The Wall Street Journal, and I think you will too.

 Under current regulations, Registered Investment Advisor firms like Posey Capital are subject to the fiduciary standard, which means we must put clients' highest interests before our own, and we must tell you about any conflicts of interest we may have. In contrast, most brokers and insurance agents are only subject to the suitability standard. If two equally "suitable" products are available and one earns the broker a higher commission (read: may cost you more),  he or she can recommend the costlier product ... and then keep mum about the conflict of interest. Really.

Currently under hot discussion in Congress is whether all financial intermediaries -- advisors, brokers and agents alike -- should be subject to the same standards. However the debate is resolved, Posey Capital will continue to consider our clients' highest interests first. We intentionally accept no commissions for any solutions we recommend -- that's $0.00. I think it's a lot easier to simply not have any conflicts of interest than to worry about disclosing them. It's my legal obligation, but it also just makes good sense. As one individual commenting on the WSJ article observed, "It really is too simple to be this complicated."

True or false: Investing in the stock market is riskier than heading to the bank and purchasing a CD?

Actually, this is a trick question because the answer is: It depends! It depends on what you mean by “risk.” When investing over the long haul, there are two types of risk to consider.

Investment Risk

When you invest in the stock market, your holdings might go up (reward) or they might go down (risk). These gains or losses show up as real dollars that you can see in your monthly account statements, and they can be exciting or scary to watch, depending on which way they’re headed. That’s investment risk.

Hands down, it is absolutely true that you face a lot more of this type of investment risk by participating in the stock market than by purchasing CDs or similar kinds of “fixed income,” where a penny saved is highly likely to be a penny earned. For better or worse, your CD’s monthly statement will pretty much look the same every month.

On the other hand, by investing in the stock market, you are expected (although not guaranteed) to earn more real return than from purchasing fixed income such as CDs — if you stay the course and stoically accept the required investment risk. Historically, that equity risk premium has been around 5 percent per year.

Compare this to inflation, which has been around 3 percent per year … and which brings me to my next point.

Inflation Risk

While stocks are more vulnerable to investment risk, fixed income is far more vulnerable to inflation risk, or the risk that the purchasing power of your money will decrease over time in the face of inflation.

Think of it like a leaky bucket, in which the drops of water being added (such as CD interest) aren’t enough to compensate for the hole in the bottom (inflation). Or, for a real example of how inflation impacts your spending power, consider the price of postage. It cost you $0.06 in 1970 versus today’s $0.44 to deliver the same letter.

Inflation risk can wreak havoc on your wealth. There are periods, sometimes lengthy and severe, during which purchasing power is so diminished by inflation that “safe” investments actually yield significant negative real returns when measured with their ability to keep pace with inflation. In addition, inflation risk is insidious, because the damage doesn’t show up us obviously negative numbers in your monthly returns statements. Dimensional Fund Advisors’ CEO David Booth provides a fascinating presentation on the subject, which I recommend you view for more details and specific data-driven illustrations on the subject.

Let’s return to our true/false question: Are stocks “riskier” than CDs? As is so often the case, the truth seems to lie between the two extremes. The best way to manage risk is by building a well-diversified portfolio that controls for inflation risk with equities and dampens investment risk with fixed income.

In a seven-minute video, David Booth, the chairman of Dimensional Fund Advisors, explains why inflation makes US Treasury bills riskier for the long-term investor than stocks.